NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Business Operations- Designer Brands Inc. ("we," "us," "our," and the "Company") is one of the world's largest designers, producers, and retailers of footwear and accessories. We operate in three reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The U.S. Retail segment operates the DSW Designer Shoe Warehouse ("DSW") banner through its direct-to-consumer U.S. stores and e-commerce site. The Canada Retail segment operates The Shoe Company and DSW banners through its direct-to-consumer Canada stores and e-commerce sites. The Brand Portfolio segment earns revenue from the wholesale of products to retailers and international distributors, commissions for serving retailers as the design and buying agent for products under private labels (referred to as "First Cost"), and the sale of our branded products through direct-to-consumer e-commerce sites at www.vincecamuto.com and www.topoathletic.com. Our equity investments in ABG-Camuto, LLC ("ABG-Camuto") and Le Tigre 360 Global LLC ("Le Tigre") are an integral part of the Brand Portfolio segment. In partnership with Authentic Brands Group LLC, a global brand management and marketing company, we have a 40% ownership interest in ABG-Camuto, a joint venture that owns the intellectual property rights of Vince Camuto and others. ABG-Camuto is responsible for the growth and marketing of the brands held by the joint venture. We have entered into a licensing agreement with ABG-Camuto, whereby we pay royalties to ABG-Camuto based on the sales of licensed products, subject to guaranteed minimums. ABG-Camuto also earns royalties on sales from third parties that license the brand names to produce non-footwear product categories. In July 2022, we acquired a 33.3% ownership interest in Le Tigre, which manages the Le Tigre brand. We entered into a license agreement with Le Tigre, whereby we pay royalties to Le Tigre based on the sales of the Le Tigre brand, subject to guaranteed minimums. The license agreement provides us the exclusive right to design, source, and sell Le Tigre branded footwear. We recognize equity investments and earnings under the equity method within the Brand Portfolio segment. In addition, we own the licensing rights for footwear of the Jessica Simpson brand and for footwear and handbags of the Lucky Brand. Our other operating segment, which we exited during 2020, is below the quantitative and qualitative thresholds for a reportable segment and is aggregated into Other for segment reporting purposes.
On December 13, 2022, we acquired a 79.4% ownership interest in Topo Athletic LLC ("Topo"), a designer of specialty athletic footwear that sells its Topo branded products at wholesale to retailers and international distributors and through its direct-to-consumer e-commerce site at www.topoathletic.com. The Topo acquisition provides us with expanded capabilities within the athletic footwear market. Topo is included within our Brand Portfolio segment.
Fiscal Year- Our fiscal year ends on the Saturday nearest to January 31. References to a fiscal year (e.g., "2022") refer to the calendar year in which the fiscal year begins. This reporting schedule is followed by many national retail companies and typically results in a 52-week fiscal year, but occasionally will contain an additional week resulting in a 53-week fiscal year (including 2023). The periods presented in these consolidated financial statements each consisted of 52 weeks.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation- The consolidated financial statements include the accounts of Designer Brands Inc. and its subsidiaries, including any variable interest entities. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in United States ("U.S.") dollars.
Use of Estimates- The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and reported amounts of net sales and expenses during the reporting periods. Certain estimates and assumptions use forecasted financial information based on information reasonably available to us. Significant estimates and assumptions are required as a part of accounting for sales returns allowances, customer allowances and discounts reserve, gift card breakage income, deferred revenue associated with loyalty programs, valuation of inventories, depreciation and amortization, impairments of long-lived assets, intangibles and goodwill, lease accounting, redeemable noncontrolling interest, income taxes and valuation allowances on deferred tax assets, self-insurance reserves, and valuations used to account for an acquisition. Although we believe these estimates and assumptions are reasonable, they are based on management's knowledge of current events and actions we may undertake in the future. Changes in facts and circumstances may result in revised estimates and assumptions, and actual results could differ from these estimates.
Revenue Recognition- Sales from the U.S. Retail and Canada Retail segments are recognized upon customer receipt of merchandise, net of estimated returns and exclude sales tax. Customers can purchase products from one of our stores, online, or from our mobile application. For products shipped directly to our customers, we recognize the sale upon the estimated customer receipt date based on historical delivery transit times. Revenue from shipping and handling is recorded in net sales while the related costs are included in cost of sales on the consolidated statements of operations. For products shipped directly to our customers from our vendors (referred to as "drop ship"), we record gross sales upon customer receipt based on the price paid by the customers as we have determined that we are the principal party responsible for the sale transaction.
Sales from the Brand Portfolio segment are recognized upon transfer of control. Generally, our wholesale customers arrange their own transportation of merchandise, and control is transferred at the time of shipment. Sales are recorded at the transaction price, excluding sales tax, net of estimated reserves for customer returns, allowances and discounts. Direct-to-consumer online sales are recognized upon the estimated customer receipt date based on historical delivery transit times and are net of estimated returns and exclude sales tax. First Cost commission income is recognized at the point in time when the customer's freight forwarder takes control of the related merchandise.
Gift Cards- Amounts received from the sale of gift cards are recorded as a liability and are recognized as sales when the cards are redeemed for merchandise. Based on historical information, the likelihood of a gift card remaining unredeemed (referred to as "breakage") can be reasonably estimated at the time of gift card issuance. Breakage income is recognized over the estimated average redemption period of redeemed gift cards.
Loyalty Programs- We offer loyalty programs to our customers in the U.S. and Canada. Members under the programs earn points based on their level of spending, as well as for various other activities. Upon reaching a specified point threshold, members receive reward certificates that may be redeemed for purchases made within the stated expiration date. We record a reduction of net sales when points are awarded based on an allocation of the initial customer purchase and the stand-alone value of the points earned. We maintain a deferred liability for the outstanding points and certificates based on historical conversion and redemption rates. The deferred liability is reduced and sales are recognized when certificates are redeemed or when points and certificates expire.
Cost of Sales- Cost of sales from the U.S. Retail and Canada Retail segments is recognized net of estimated returns. In addition to the cost of merchandise sold, which includes freight and the impact of markdowns, shrink and other inventory valuation adjustments, we include expenses associated with distribution and fulfillment and store occupancy in cost of sales. Distribution and fulfillment expenses comprise of labor costs, third-party fees, rent, depreciation, insurance, utilities, maintenance and other operating costs. Store occupancy expenses include rent, utilities, repairs, maintenance, insurance, janitorial costs, and occupancy-related taxes, but exclude depreciation.
Cost of sales from the Brand Portfolio segment is recognized net of estimated returns. In addition to the cost of merchandise sold, which includes freight and the impact of inventory valuation adjustments, we include royalty expense for licensed brands in cost of sales.
Operating Expenses- Operating expenses include expenses related to store management and store payroll costs, advertising, store depreciation, new store costs, design, sourcing and distribution costs associated with the Brand Portfolio segment, and corporate expenses. Corporate expenses include expenses related to buying, information technology, rent (net of sublease income), depreciation and amortization expense for corporate assets, marketing, legal, finance, outside professional services, customer service center expenses, and payroll-related costs for associates.
In March 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which, among other things, provided employer payroll tax credits for wages paid to associates who were unable to work over a defined period and options to defer payroll tax payments. We qualified for certain employer payroll tax credits, which were treated as government subsidies to offset related operating expenses. Similar credits were also available in Canada. During 2021 and 2020, the qualified government credits reduced our operating expenses by $4.0 million and $11.4 million, respectively, on the consolidated statements of operations.
Interest Expense, net- Interest expense, net, is summarized in the following table:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Interest expense | $ | (15,099) | | | $ | (32,198) | | | $ | (24,032) | |
Interest income | 225 | | | 69 | | | 338 | |
| $ | (14,874) | | | $ | (32,129) | | | $ | (23,694) | |
Stock-Based Compensation- We recognize compensation expense for awards of stock options, restricted stock units ("RSUs"), and director stock units, based on the fair value on the grant date and on a straight-line basis over the requisite service period for the awards that are expected to vest, with forfeitures estimated based on our historical experience and future expectations. Stock-based compensation is included in operating expenses on the consolidated statements of operations.
Chief Executive Officer Transition- In January 2023, we announced our planned succession process relating to the Company's Chief Executive Officer ("CEO") role, whereby our current CEO, Roger Rawlins, will step down from his role as CEO and as a member of the Board of Directors effective April 1, 2023, or such earlier date as determined by the Board of Directors, at which time Doug Howe, who currently serves as Executive Vice President of the Company and President of DSW, will assume the CEO role and join the Board of Directors as a Class II director. To assist in facilitating a smooth transition, Mr. Rawlins will remain employed under the terms of a transition and consulting agreement through April 1, 2023, and for the 12-month period thereafter will serve as a strategic advisor to the Company and the Board of Directors. If Mr. Rawlins remains employed through April 1, 2023, we will provide Mr. Rawlins benefits that are consistent with those that Mr. Rawlins would be entitled to in the event of a termination by the Company without cause under his Amended and Restated Standard Executive Severance Agreement. In conjunction with the CEO transition, we estimate CEO transition costs will total $9.4 million consisting of $3.5 million in severance costs, $2.8 million in accelerated stock-based compensation (net of stock awards forfeited), and $3.1 million in retention stock awards to certain members of our leadership team and other related professional fees. During the fourth quarter of 2022, we recognized $3.7 million in operating expenses on the consolidated statements of operations, with the remaining estimated $5.7 million to be recorded in 2023.
Severance- During 2022, we incurred severance costs, excluding the severance related to the CEO transition, of $2.8 million ($1.8 million, $0.2 million and $0.8 million for the U.S. Retail, Canada Retail, and Brand Portfolio segments, respectively). During 2021, we incurred severance costs of $3.3 million ($1.5 million and $1.8 million for the U.S. Retail and Brand Portfolio segments, respectively).
On March 18, 2020, to help control the spread of the coronavirus ("COVID-19") and protect the health and safety of our customers, associates, and the communities we serve, we temporarily closed all of our stores in the U.S. and Canada. In addition, we took several actions in late March 2020 to reduce costs and operations to levels that were more commensurate with then-current sales, including furloughs and pay reductions. During the second quarter and into the third quarter of 2020, we re-opened all of our stores, discontinued the furlough program, and restored pay for our associates that had taken pay reductions. Beginning in July 2020, we initiated an internal reorganization and reduction of our workforce with additional actions taken throughout 2020 and into the first quarter of 2021, resulting in the elimination of approximately 1,000 associate positions. During 2020, we incurred restructuring costs, which consisted primarily of severance costs of $15.2 million ($5.5 million, $0.8 million and $8.9 million for the U.S. Retail, Canada Retail, and Brand Portfolio segments, respectively).
As of January 28, 2023 and January 29, 2022, we had $5.7 million and $1.9 million, respectively, of severance liability included in accrued expenses on the consolidated balance sheets.
Gain on Settlement- During 2020, we collected $9.0 million, net of legal costs incurred, and recorded a gain to operating expenses on the consolidated statements of operations that was due to a settlement with a vendor related to costs incurred on an internal-use software project that was capitalized and then impaired in a previous year.
Marketing Expense- The cost of advertising is generally expensed when the advertising first takes place or when mailed. During 2022, 2021 and 2020, marketing costs were $167.1 million, $163.0 million and $131.7 million, respectively.
Non-Operating Income (Expenses), net- Non-operating income (expenses), net, includes gains and losses from foreign currency revaluation and realized gains and losses related to investments.
Income Taxes- We account for income taxes under the asset and liability method. We determine the aggregate amount of income tax expense to accrue and the amount that will be currently payable based upon tax statutes of each jurisdiction in which we do business. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and respective tax bases and operating loss and tax credit carryforwards, as measured using enacted tax rates expected to be in effect in the periods when temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become realizable.
We recorded our income tax expense, income tax receivable, and deferred tax assets and related liabilities based on management's best estimates. Additionally, we assessed the likelihood of realizing the benefits of our deferred tax assets by evaluating historical and projected future operating results, the reversal of existing temporary differences, taxable income in permitted carry back years, and the availability of tax planning strategies. One of the provisions of the CARES Act allows net operating losses generated within tax years 2018 through 2020 to be carried back up to five years, including years in which the U.S. federal statutory tax rate was 35%, as opposed to the current rate of 21%. In evaluating future taxable income, significant weight is given to positive and negative evidence that is objectively verifiable.
During 2020, a valuation allowance was recognized as a reserve on the total deferred tax asset balance and was maintained until the fourth quarter of 2022. This valuation allowance was the result of losses incurred in 2020 due to the impacts of the COVID-19 pandemic that resulted in a three-year cumulative loss position, which was significant objective negative evidence in considering whether deferred tax assets were realizable. During the fourth quarter of 2022, we released the valuation allowance on the majority of the U.S. and Canada deferred tax assets given the continued realization of income since 2020, being in a three-year cumulative adjusted earnings position, and having projected future income. These factors provided sufficient evidence to conclude that it is more likely than not that the majority of the U.S. and Canada deferred tax assets are realizable. Our effective tax rate for 2022 was negative 2.0%, whereas for 2021 and 2020 it was positive 10.7% and 19.7%, respectively. The rate for 2022 was the result of releasing $55.7 million of the valuation allowance, partially offset by the permanent tax adjustments, primarily non-deductible compensation. The rate for 2021 was the result of maintaining a full valuation allowance on deferred tax assets, while also recording net discrete tax benefits, primarily as a result of adjustments to our estimated 2020 return reflecting implemented tax strategies. The rate for 2020 was the result of recording a valuation allowance of $87.6 million, partially offset by the ability to carry back current year losses to a tax year where the U.S. federal statutory tax rate was 35%.
We review and update our tax positions as necessary to add any new uncertain tax positions taken, or to remove previously
identified uncertain positions that have been adequately resolved. Additionally, uncertain positions may be remeasured as
warranted by changes in facts or law. Accounting for uncertain tax positions requires estimating the amount, timing and
likelihood of ultimate settlement. Although we believe that these estimates are reasonable, actual results could differ from
these estimates.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implements a 15% minimum tax on book income of certain large corporations and a 1% excise tax on net stock repurchases. Based on our current analysis of the provisions, we do not believe this legislation will have a material impact on our consolidated financial statements.
Cash, Cash Equivalents, and Restricted Cash- Cash and cash equivalents represent cash, money market funds, and credit card receivables that generally settle within three days. Restricted cash represented cash that was restricted as to withdrawal or usage and consists of a mandatory cash deposit maintained for certain insurance policies and letters of credit.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown on the consolidated statements of cash flows:
| | | | | | | | | | | | | | | | | |
(in thousands) | January 28, 2023 | | January 29, 2022 | | January 30, 2021 |
Cash and cash equivalents | $ | 58,766 | | | $ | 72,691 | | | $ | 59,581 | |
Restricted cash, included in prepaid expenses and other current assets | — | | | 1,768 | | | — | |
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 58,766 | | | $ | 74,459 | | | $ | 59,581 | |
Investments- We determine the balance sheet classification of investments at the time of purchase and evaluate the classification at each balance sheet date. For the balance sheet dates presented, we did not hold any investments in securities other than cash equivalents. We account for investments using the equity method of accounting when we exercise significant influence over the investment. If we do not exercise significant influence, we account for the investment using the cost method of accounting. Cost method investments are included in other assets on the consolidated balance sheets. We evaluate our investments for impairment and whether impairment is other-than-temporary at each balance sheet date.
The following table presents activity related to our equity investments:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Balance at beginning of period | $ | 55,578 | | | $ | 58,598 | | | $ | 57,760 | |
Investment in Le Tigre | 8,228 | | | — | | | — | |
Share of net earnings | 8,864 | | | 8,986 | | | 9,329 | |
Distributions received | (8,850) | | | (12,006) | | | (8,491) | |
Balance at end of period | $ | 63,820 | | | $ | 55,578 | | | $ | 58,598 | |
On July 1, 2022, we acquired a 33.3% ownership interest in Le Tigre for $8.2 million. We account for our investment in Le Tigre, where we exercise significant influence but do not have control, using the equity method. The difference between the purchase price of Le Tigre and our interest in Le Tigre's underlying net equity is comprised of a definite lived tradename intangible asset and equity method goodwill. Our share of net loss of Le Tigre and amortization of the intangible asset is included in the share of net earnings, net, shown in the table above and income from equity investments on the consolidated statements of operations.
Receivables, net- Receivables are classified as current assets because the average collection period is generally shorter than one year. We monitor our exposure for credit losses based upon specific receivable balances and we record related allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We utilize an unrelated third-party provider for credit and collection services for receivables from the sale of wholesale products to certain retailers. This third-party provider guarantees payment for the majority of the serviced receivables.
Inventories- All of our inventory is made up of finished goods. The U.S. Retail segment inventory is accounted for using the retail inventory method and is stated at the lower of cost or market. Under the retail inventory method, the valuation of inventories at cost and the resulting gross profits are determined by applying a calculated cost-to-retail ratio to the retail value of inventories. The cost basis of inventories is decreased by charges to cost of sales at the time the retail value of the inventory is lowered by markdowns. As a result, earnings are negatively impacted as the merchandise is marked down prior to sale. The Canada Retail segment and the Brand Portfolio segment inventory is accounted for using the moving average cost method and is stated at the lower of cost or net realizable value. We monitor aged inventory for obsolete and slow-moving inventory that may need to be liquidated in the future at amounts below cost. Reductions to inventory values establish a new cost basis. Favorable changes in facts or circumstances do not result in an increase in the newly established cost basis.
We perform physical inventory counts or cycle counts on all inventory on hand throughout the year and adjust the recorded balance to reflect the results. We record estimated shrink between physical inventory counts, based on historical experience and recent results, less amounts realized.
Inherent in the calculation of inventories are certain significant judgments and estimates, including setting the original merchandise retail value, markdowns, shrink, and liquidation values. The ultimate amount realized from the sale of inventory and write-offs from counts could differ from management estimates.
Concentration of Risks- We are subject to risks due to concentration of our merchandise coming from China. All of the products manufactured through the Brand Portfolio segment come from third-party facilities outside of the U.S., with 76% of units sourced from China. In addition to the merchandise sourced through our Brand Portfolio segment, our U.S. Retail segment and Canada Retail segment also sources merchandise from both domestic and foreign third-party vendors. Many of our domestic vendors import a large portion of their merchandise from China.
We are also subject to risks due to the concentration of vendors within the U.S. Retail and Canada Retail segments. During 2022, three key third-party vendors together supplied approximately 22% of our retail merchandise, with no individual vendor providing more than 10% of our retail merchandise.
Financial instruments, which principally subject us to concentration of credit risk, consist of cash and cash equivalents. We invest excess cash when available through financial institutions in money market accounts. At times, such amounts invested through banks may be in excess of Federal Deposit Insurance Corporation insurance limits, and we mitigate the risk by utilizing multiple banks.
Fair Value- Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to the subjectivity associated with the inputs to fair value measurements as follows:
• Level 1 - Quoted prices in active markets for identical assets or liabilities.
• Level 2 - Quoted prices for similar assets or liabilities in active markets or inputs that are observable.
• Level 3 - Unobservable inputs in which little or no market activity exists.
The carrying value of cash and cash equivalents, restricted cash, receivables, and accounts payables approximated their fair values due to their short-term nature. The carrying value of borrowings under our revolving lines of credit approximated fair value based on its term and variable interest rate.
Property and Equipment, net- Property and equipment, net, are stated at cost less accumulated depreciation determined by the straight-line method over the expected useful life of assets. The net book value of property or equipment sold or retired is removed from the asset and related accumulated depreciation accounts with any resulting net gain or loss included in results of operations.
Internal Use Software Costs- Costs related to software developed or obtained for internal use are expensed as incurred until the application development stage has been reached. Once the application development stage has been reached, certain qualifying costs are capitalized until the software is ready for its intended use. Capitalized software costs and the related accumulated amortization are included in property and equipment, net, on the consolidated balance sheets. Capitalized implementation costs for cloud computing arrangements accounted for as service contracts are included in other assets on the consolidated balance sheets and amortized over the life of the service contract to operating expenses on the consolidated statements of operations.
Leases- A lease liability for new and modified leases is recorded based on the present value of future fixed lease commitments with a corresponding lease asset. For leases classified as operating leases, we recognize a single lease cost on a straight-line basis based on the combined amortization of the lease liability and the lease asset. Other leases will be accounted for as finance arrangements. For real estate leases, we are generally required to pay base rent, real estate taxes, and insurance, which are considered lease components, and maintenance, which is a non-lease component. We have elected to not separate non-lease payment components from the associated lease component for all new and modified real estate leases. We determine the discount rate for each lease by estimating the rate that we would be required to pay on a secured borrowing for an amount equal to the lease payments over the lease term. The majority of our real estate leases provide for renewal options, which are typically not included in the lease term used for measuring the lease assets and lease liabilities as it is not reasonably certain we will exercise renewal options. We monitor for events or changes in circumstances that may require a reassessment of our leases and determine if a remeasurement is required.
Impairment of Long-Lived Assets- We periodically evaluate the carrying amount of our long-lived assets, primarily operating lease assets, property and equipment and definite-lived intangible assets, when events and circumstances warrant such a review to ascertain if any assets have been impaired. The reviews are conducted at the lowest identifiable level. The carrying amount of a long-lived asset or asset group is considered impaired when the carrying value of the asset or asset group exceeds the expected future cash flows from the asset or asset group. The impairment loss recognized is the excess of the carrying value of the asset or asset group over its fair value (categorized as Level 3 under the fair value hierarchy). Fair value at the store level is typically based on projected discounted cash flows over the remaining lease term.
During 2022, we recorded impairment charges of $4.3 million, primarily in the Brand Portfolio segment resulting from subleases of abandoned leased spaces. During 2021, we recorded impairment charges of $1.7 million, including $1.2 million in the U.S. Retail segment for abandoned equipment we replaced and $0.5 million in the Brand Portfolio segment for the sublease of an abandoned leased space.
As a result of the material reduction in net sales and cash flows during 2020 due to the COVID-19 pandemic, we updated our impairment analyses for our U.S. Retail and Canada Retail segments at the store-level, which represents the lowest level for which identifiable cash flows are independent of the cash flows of other assets. The carrying amount of the store asset group, primarily made up of operating lease assets, leasehold improvements and fixtures, is considered impaired when the carrying value of the asset group exceeds the expected future cash flows from the asset group. Fair value at the store level is typically based on projected discounted cash flows over the remaining lease term. In addition, we evaluated other long-lived assets based on our intent to use such assets going forward. During 2020, we recorded impairment charges of $127.1 million ($104.2 million and $22.9 million for the U.S. Retail and Canada Retail segments, respectively). Also, during 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible asset resulting in a full impairment due to the lack of projected cash flows over the remaining useful life (categorized as Level 3 under the fair value hierarchy).
Goodwill and Other Indefinite Lived Intangible Assets- We evaluate goodwill and other indefinite lived intangible assets for impairment annually during our fourth quarter, or more frequently if an event occurs or circumstances change that would indicate that impairment may exist. When evaluating for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that there is an impairment. If we do not perform a qualitative assessment, or if we determine that it is more likely than not that the carrying value exceeds its fair value, we will calculate the estimated fair value. Fair value is typically calculated using a discounted cash flow analysis. Where deemed appropriate, we may also utilize a market approach for estimating fair value. Impairment charges are calculated as the amount by which the carrying amount exceeds its fair value, but not to exceed the carrying value for goodwill.
As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores, the decrease in net sales from our retailer customers, and the decrease in the Company's market capitalization due to the impact of the COVID-19 pandemic on macroeconomic conditions, we performed an impairment analysis for goodwill and other indefinite-lived intangible assets during the first quarter of 2020. We calculated the fair value of the reporting units with goodwill primarily based on a discounted cash flow analysis (categorized as Level 3 under the fair value hierarchy). Our analysis concluded that the fair value of the First Cost reporting unit within the Brand Portfolio segment did not exceed its carrying value. Accordingly, during 2020, we recorded an impairment charge of $20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment.
Self-Insurance Reserves- We record estimates for certain health and welfare, workers' compensation and casualty insurance costs that are self-insured programs. Self-insurance reserves include actuarial estimates of both claims filed, carried at their expected ultimate settlement value, and claims incurred but not yet reported. The liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. Estimates for self-insurance reserves are calculated utilizing claims development estimates based on historical experience and other factors. We have purchased stop loss insurance to limit our exposure on a per person basis for health and welfare and on a per claim basis for workers' compensation and general liability, as well as on an aggregate annual basis.
Redeemable noncontrolling interest- As discussed in more detail in Note 2, Acquisition, we have an exclusive call option to purchase and the noncontrolling interest holders have a put option with respect to the remaining 20.6% ownership interest in Topo upon the occurrence of certain events or after a defined period of time following the transaction close. The redemption price is based on the future performance of Topo. As a result of the redemption feature, we record the remaining interest in Topo as a redeemable noncontrolling interest in temporary equity on the consolidated balance sheets. The noncontrolling interest is adjusted each reporting period for the net income (loss) attributable to the noncontrolling interest. Each reporting period, a measurement period adjustment, if any, is then recorded to adjust the noncontrolling interest to the higher of either the redemption value, assuming it was redeemable at the reporting date, or its carrying value. Any adjustments are also recorded as net income (loss) attributable to the noncontrolling interest.
The following table presents activity related to our redeemable noncontrolling interest:
| | | | | | | | | |
(in thousands) | 2022 | | | | |
Balance at beginning of period | $ | — | | | | | |
Acquisition fair value of redeemable noncontrolling interest | 3,165 | | | | | |
Net loss attributable to redeemable noncontrolling interest | (10) | | | | | |
| | | | | |
Balance at end of period | $ | 3,155 | | | | | |
Foreign Currency Translation and Transactions- Our wholly-owned Canadian subsidiary has Canadian dollars as its functional currency. Assets and liabilities of this business are translated into U.S. dollars at exchange rates in effect at the balance sheet date or historical rates as appropriate. Each quarter, amounts included in the consolidated statements of operations from this business are translated at the average exchange rate for the period. The cumulative translation adjustments resulting from changes in exchange rates are included as a component of accumulated other comprehensive loss on the consolidated balance sheets. Transaction gains and losses are included in non-operating income (expenses), net, on the consolidated statements of operations.
Deferred Compensation Plans- We provide deferred compensation plans, including defined contribution plans to eligible associates and a non-qualified deferred compensation plan for certain executives and members of the Board of Directors. Participants may elect to defer and contribute a portion of their eligible compensation to the plans up to limits stated in the plan documents, not to exceed the dollar amounts set by applicable laws. During 2022, 2021 and 2020, we recognized costs associated with matching contributions of $6.2 million, $5.9 million and $5.3 million, respectively.
Variable Interest Entity- We had a joint venture with an entity affiliated with performing artist and celebrity Jennifer Lopez, which was formed in order to design, source and sell the JLO Jennifer Lopez collection, a line of footwear and handbags. Our Brand Portfolio segment was responsible for design and sourcing, and DSW was the primary retailer of the brand. Jennifer Lopez earned fixed licensing fees, which we guaranteed for the term of license. Based on certain terms within the joint venture operating agreement, we determined that we had overall control of the joint venture. As a result, we were considered the primary beneficiary, and we consolidated the joint venture within our financial statements. Assets and liabilities of the joint venture are immaterial. During 2022, we agreed to dissolve the joint venture along with related licensing and design and sourcing arrangements, which resulted in recording a termination fee of $5.2 million to operating expenses on the consolidated statements of operations.
2. ACQUISITION
On December 13, 2022, we acquired a 79.4% ownership interest in Topo for $19.1 million in cash. We have an exclusive call option to purchase the remaining 20.6% ownership interest in Topo upon the occurrence of certain events or after a period of two years following the close of the transaction. The noncontrolling interest holders also have a put option with respect to the remaining 20.6% ownership interest in Topo upon the occurrence of certain events or after a period of three years following the close of the transaction. The redemption price is defined in the operating agreement and is based primarily on a fixed multiple of Topo's trailing 12 months of adjusted earnings before interest, taxes, depreciation, amortization, and other agreed upon adjustments.
The preliminary purchase price and the allocation of the total consideration to the fair values of the assets, liabilities, and redeemable noncontrolling interest consisted of the following:
| | | | | |
(in thousands) | Preliminary Purchase Price and Allocation as of December 13, 2022 |
Purchase price cash consideration | $ | 19,062 | |
Fair value of assets and liabilities acquired: | |
Accounts receivables | $ | 3,195 | |
Inventories | 5,612 | |
Goodwill | 3,460 | |
Intangible assets | 12,500 | |
Other assets | 1,898 | |
Accounts payable and other liabilities | (4,438) | |
Redeemable noncontrolling interest | (3,165) | |
| $ | 19,062 | |
We recorded an allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed and the redeemable noncontrolling interest based on their fair value at the acquisition date. The purchase price is subject to adjustments primarily based upon a working capital provision as provided by the purchase agreement. The allocation of the purchase price is based on certain preliminary valuations and analysis that have not been completed as of the date of this filing. Any subsequent changes in the estimated fair values assumed upon the finalization of more detailed analysis within the
measurement period will change the allocation of the purchase price and will be adjusted during the period in which the amounts are determined. We expect to finalize the valuations as soon as practicable, but not later than one year from the acquisition date.
The fair value of the intangible assets relates to customer relationships and a tradename, which are amortized over a useful life of eight and 15 years, respectively, and are based on the excess earnings method under the income approach. The fair value measurements are based on significant unobservable inputs, including discounted future cash flows and customer attrition rates.
The fair value measurement of the redeemable noncontrolling interest was calculated by considering the implied fair value of Topo using the purchase price and an estimated amount to redeem the noncontrolling interest.
The goodwill represents the excess of the purchase price over the fair value of the net assets acquired and was primarily attributable to acquiring an established design and sourcing process for athletic footwear. Goodwill is expected to be deductible for income tax purposes.
The results of operations for Topo from the date of acquisition through the end of 2022, were not material and are included in the consolidated statements of operations within the Brand Portfolio segment. Pro forma results of operations reflecting the acquisition of Topo are not presented as the impact of Topo on our consolidated financial results would not have been material. We incurred $1.3 million of acquisition-related costs in connection with the acquisition of Topo, which were included in operating expenses on the consolidated statements of operations.
3. REVENUE
DISAGGREGATION OF NET SALES
Net Sales by Brand Categories- The following table presents net sales disaggregated by brand categories for each segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | U.S. Retail | | Canada Retail | | Brand Portfolio | | Eliminations / Other | | Consolidated |
2022 | | | | | | | | | |
Owned Brands:(1) | | | | | | | | | |
Direct-to-consumer | $ | 569,741 | | | $ | — | | | $ | 37,840 | | | $ | — | | | $ | 607,581 | |
External customer wholesale and commission income | — | | | — | | | 202,834 | | | — | | | 202,834 | |
Intersegment wholesale and commission income | — | | | — | | | 87,041 | | | (87,041) | | | — | |
Total Owned Brands | 569,741 | | | — | | | 327,715 | | | (87,041) | | | 810,415 | |
National brands | 2,221,772 | | | — | | | — | | | — | | | 2,221,772 | |
Canada Retail(2) | — | | | 283,241 | | | — | | | — | | | 283,241 | |
Total net sales | $ | 2,791,513 | | | $ | 283,241 | | | $ | 327,715 | | | $ | (87,041) | | | $ | 3,315,428 | |
2021 | | | | | | | | | |
Owned Brands:(1) | | | | | | | | | |
Direct-to-consumer | $ | 421,398 | | | $ | — | | | $ | 27,876 | | | $ | — | | | $ | 449,274 | |
External customer wholesale and commission income | — | | | — | | | 164,192 | | | — | | | 164,192 | |
Intersegment wholesale and commission income | — | | | — | | | 93,956 | | | (93,956) | | | — | |
Total Owned Brands | 421,398 | | | — | | | 286,024 | | | (93,956) | | | 613,466 | |
National brands | 2,348,308 | | | — | | | — | | | — | | | 2,348,308 | |
Canada Retail(2) | — | | | 234,809 | | | — | | | — | | | 234,809 | |
Total net sales | $ | 2,769,706 | | | $ | 234,809 | | | $ | 286,024 | | | $ | (93,956) | | | $ | 3,196,583 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | U.S. Retail | | Canada Retail | | Brand Portfolio | | Eliminations / Other | | Consolidated |
2020 | | | | | | | | | |
Owned Brands:(1) | | | | | | | | | |
Direct-to-consumer | $ | 260,618 | | | $ | — | | | $ | 21,299 | | | $ | — | | | $ | 281,917 | |
External customer wholesale and commission income | — | | | — | | | 156,631 | | | — | | | 156,631 | |
Intersegment wholesale and commission income | — | | | — | | | 59,818 | | | (59,818) | | | — | |
Total Owned Brands | 260,618 | | | — | | | 237,748 | | | (59,818) | | | 438,548 | |
National brands | 1,539,705 | | | — | | | — | | | — | | | 1,539,705 | |
Canada Retail(2) | — | | | 182,659 | | | — | | | — | | | 182,659 | |
Other(2) | — | | | — | | | 10,898 | | | 62,909 | | | 73,807 | |
Total net sales | $ | 1,800,323 | | | $ | 182,659 | | | $ | 248,646 | | | $ | 3,091 | | | $ | 2,234,719 | |
(1) "Owned Brands" refers to those brands we have rights to sell through ownership or license arrangements.
(2) We currently do not report the Canada Retail segment net sales and Other by brand categories. Other represents discontinued revenue channels.
Net Sales by Product and Service Categories- The following table presents net sales disaggregated by product and service
categories for each segment:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Net sales: | | | | | |
U.S. Retail segment: | | | | | |
Women's footwear | $ | 1,803,486 | | | $ | 1,772,729 | | | $ | 1,161,836 | |
Men's footwear | 611,426 | | | 620,631 | | | 386,338 | |
Kids' footwear | 220,665 | | | 234,806 | | | 151,121 | |
Accessories and other | 155,936 | | | 141,540 | | | 101,028 | |
| 2,791,513 | | | 2,769,706 | | | 1,800,323 | |
Canada Retail segment: | | | | | |
Women's footwear | 151,459 | | | 117,045 | | | 92,623 | |
Men's footwear | 75,401 | | | 60,972 | | | 45,665 | |
Kids' footwear | 44,931 | | | 48,503 | | | 37,233 | |
Accessories and other | 11,450 | | | 8,289 | | | 7,138 | |
| 283,241 | | | 234,809 | | | 182,659 | |
Brand Portfolio segment: | | | | | |
Wholesale | 276,887 | | | 240,491 | | | 197,940 | |
Commission income | 12,988 | | | 17,657 | | | 18,509 | |
Direct-to-consumer | 37,840 | | | 27,876 | | | 32,197 | |
| 327,715 | | | 286,024 | | | 248,646 | |
Other | — | | | — | | | 62,909 | |
Total segment net sales | 3,402,469 | | | 3,290,539 | | | 2,294,537 | |
Elimination of intersegment sales | (87,041) | | | (93,956) | | | (59,818) | |
Total net sales | $ | 3,315,428 | | | $ | 3,196,583 | | | $ | 2,234,719 | |
DEFERRED REVENUE LIABILITIES
We record deferred revenue liabilities, included in accrued expenses on the consolidated balance sheets, for remaining obligations we have to our customers. The following table presents the changes and total balances for gift cards and loyalty programs:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Gift cards: | | | | | |
Beginning of period | $ | 36,783 | | | $ | 34,442 | | | $ | 35,461 | |
Gift cards redeemed and breakage recognized to net sales | (74,016) | | | (75,352) | | | (59,173) | |
Gift cards issued | 72,354 | | | 77,693 | | | 58,154 | |
End of period | $ | 35,121 | | | $ | 36,783 | | | $ | 34,442 | |
Loyalty programs: | | | | | |
Beginning of period | $ | 15,736 | | | $ | 11,379 | | | $ | 16,138 | |
Loyalty certificates redeemed and expired and other adjustments recognized to net sales | (32,923) | | | (30,453) | | | (25,049) | |
Deferred revenue for loyalty points issued | 34,087 | | | 34,810 | | | 20,290 | |
End of period | $ | 16,900 | | | $ | 15,736 | | | $ | 11,379 | |
CUSTOMER ALLOWANCES
We reduce sales by the amount of actual and remaining expected sales returns and customer allowances and discounts, and cost of sales by the amount of merchandise we expect to recover. Sales returns allowances and customer allowances and discounts are included in accrued expenses on the consolidated balance sheets. Customer allowances and discounts are provided to our wholesale customers for margin assistance, advertising support, and various other deductions. We estimate the allowances needed for margin assistance by reviewing inventory levels held by retailers, expected markdowns, gross margins realized, and other performance indicators. Sales returns and other customer deductions are estimated based on anticipated future returns using historical experience and trends. Advertising allowances are estimated based on arrangements with customers.
The following table presents the changes and total balances for customer allowances:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Sales returns allowances: | | | | | |
Beginning of period | $ | 18,574 | | | $ | 17,333 | | | $ | 21,408 | |
Net sales reduced for estimated returns | 473,471 | | | 424,402 | | | 279,923 | |
Actual returns during the period | (473,938) | | | (423,161) | | | (283,998) | |
End of period | $ | 18,107 | | | $ | 18,574 | | | $ | 17,333 | |
Customer allowances and discounts: | | | | | |
Beginning of period | $ | 2,097 | | | $ | 4,579 | | | $ | 11,528 | |
| | | | | |
Net sales reduced for estimated allowances and discounts | 9,947 | | | 8,709 | | | 14,363 | |
Actual allowances and discounts during the period | (10,814) | | | (11,191) | | | (21,312) | |
End of period | $ | 1,230 | | | $ | 2,097 | | | $ | 4,579 | |
As of January 28, 2023 and January 29, 2022, the asset for recovery of merchandise returns was $8.8 million and $9.4 million, respectively, and is included in prepaid expenses and other current assets on the consolidated balance sheets.
4. RELATED PARTY TRANSACTIONS
SCHOTTENSTEIN AFFILIATES
We have transactions with entities owned or controlled by Jay L. Schottenstein, the executive chairman of our Board of Directors, and members of his family (the "Schottenstein Affiliates"). As of January 28, 2023, the Schottenstein Affiliates beneficially owned approximately 23% of the Company's outstanding common shares, representing approximately 58% of the combined voting power, consisting of, in the aggregate, 7.0 million Class A common shares and 7.7 million Class B common shares. The following summarizes the related party transactions with the Schottenstein Affiliates for the relevant periods:
Leases- We lease certain store and office locations that are owned by the Schottenstein Affiliates. We also leased a fulfillment center from a Schottenstein Affiliate through September 2022 that was not renewed. See Note 13, Leases, for rent expense and future minimum lease payment requirements associated with the Schottenstein Affiliates.
Other Purchases and Services- During 2022, 2021 and 2020, we had other purchases and services we incurred from the Schottenstein Affiliates of $4.3 million, $4.9 million and $4.8 million, respectively.
Due to Related Parties- Amounts due to the Schottenstein Affiliates, other than operating lease liabilities, were immaterial for all periods presented.
EQUITY METHOD INVESTMENTS
ABG-Camuto- We have a 40% ownership interest in ABG-Camuto. We have a licensing agreement with ABG-Camuto, pursuant to which we pay royalties on the net sales of the brands owned by ABG-Camuto, subject to guaranteed minimums. For 2022, 2021 and 2020, we recorded royalty expense for amounts paid to ABG-Camuto of $18.3 million, $18.2 million, and $18.2 million, respectively. See Note 14, Commitments and Contingencies - Contractual Obligations, for future guaranteed minimum royalty payment requirements to ABG-Camuto. Amounts due to ABG-Camuto were immaterial for all periods presented.
Le Tigre- We have a 33.3% ownership interest in Le Tigre. During 2022, we entered into a license agreement with Le Tigre, whereby we pay royalties on our net sales of the Le Tigre brand, subject to guaranteed minimums. The license agreement provides for the exclusive right to design and source Le Tigre branded footwear. Activity with Le Tigre during 2022 was immaterial.
5. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is based on net income (loss) attributable to Designer Brands Inc. and the weighted average of Class A and Class B common shares outstanding. Diluted earnings per share reflects the potential dilution of common shares adjusted for outstanding stock options and RSUs calculated using the treasury stock method.
The following is a reconciliation between basic and diluted weighted average shares outstanding, as used in the calculation of earnings (loss) per share attributable to Designer Brands Inc.:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Weighted average basic shares outstanding | 67,603 | | | 73,024 | | | 72,198 | |
Dilutive effect of stock-based compensation awards | 4,498 | | | 4,244 | | | — | |
Weighted average diluted shares outstanding | 72,101 | | | 77,268 | | | 72,198 | |
For 2022, 2021 and 2020, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings (loss) per share due to their anti-dilutive effect was 2.9 million, 3.1 million and 5.9 million, respectively.
6. STOCK-BASED COMPENSATION
The DSW Inc. 2014 Long-Term Incentive Plan (the "Plan") provides for the issuance of stock-based compensation awards to eligible recipients. The Plan replaced the DSW Inc. 2005 Equity Incentive Plan but did not affect outstanding awards granted under that plan. Eligible recipients include associates, including executive officers, and non-employee directors. The maximum number of shares of Class A common shares underlying awards that may be issued over the term of the Plan cannot exceed 11.0 million shares. As of January 28, 2023, 6.5 million Class A common shares remain available for future stock-based compensation grants under the Plan.
Stock-based compensation expense consisted of the following:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Stock options | $ | 101 | | | $ | 643 | | | $ | 1,467 | |
Restricted and director stock units | 28,401 | | | 23,280 | | | 18,769 | |
| $ | 28,502 | | | $ | 23,923 | | | $ | 20,236 | |
Stock Options- Stock options were granted with an exercise price per share equal to the fair market value of our Class A common shares on the grant date. Stock options generally vest 20% per year on a cumulative basis and remain exercisable for a period of 10 years from the date of grant. As of January 28, 2023, there were no unvested stock options, and stock option activity for the periods presented was immaterial.
Restricted Stock Units- Grants of time-based RSUs generally cliff vest after three years, and performance-based RSUs generally cliff vest after three years based upon the achievement of pre-established goals as of the end of the first year of the term. RSUs receive dividend equivalents in the form of additional RSUs, which are subject to the same restrictions and forfeiture provisions as the original award. The grant date fair value of RSUs is based on the closing market price of the Class A common shares on the date of the grant.
The following table summarizes the RSU activity for 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Time-Based RSUs | | Performance-Based RSUs |
(shares in thousands) | Number of Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value |
Outstanding - beginning of period | 6,058 | | $ | 9.60 | | | 744 | | | $ | 17.39 | |
Granted | 2,453 | | | $ | 13.35 | | | 624 | | | $ | 13.79 | |
Vested | (1,257) | | | $ | 13.77 | | | (174) | | | $ | 21.94 | |
Forfeited | (464) | | | $ | 12.41 | | | (225) | | | $ | 13.55 | |
Outstanding - end of period | 6,790 | | | $ | 9.95 | | | 969 | | | $ | 14.79 | |
The total fair value of time-based RSUs that vested during 2022, 2021 and 2020 was $17.0 million, $15.1 million and $6.5 million, respectively. As of January 28, 2023, the total compensation cost related to unvested time-based RSUs not yet recognized was $26.9 million, with a weighted average expense recognition period remaining of 1.7 years.
The total fair value of performance-based RSUs that vested during 2022, 2021 and 2020 was $3.7 million, $7.4 million and $4.0 million, respectively. As of January 28, 2023, the total compensation cost related to unvested performance-based RSUs not yet recognized was approximately $5.3 million, with a weighted average expense recognition period remaining of 1.7 years.
Director Stock Units- We issue stock units to non-employee directors. Stock units are granted to each director on the date of each annual meeting of shareholders based on the closing market price of the Class A common shares. In addition, each director that is eligible to receive compensation for board service may elect to have the cash portion of such compensation paid in the form of stock units. Director stock units vest immediately, and directors are given the option to settle their units 30 days after the grant date, at a specified date more than 30 days following the grant date, or defer receipt until completion of board service. Director stock units not yet settled, which are not subject to forfeiture, are considered to be outstanding for the purposes of computing basic earnings (loss) per share. As of January 28, 2023, we had 0.5 million director stock units not yet settled.
7. SHAREHOLDERS' EQUITY
Shares- Our Class A common shares are listed for trading under the ticker symbol "DBI" on the New York Stock Exchange. There is currently no public market for the Company's Class B common shares, but the Class B common shares can be converted into the Company's Class A common shares at the election of the holder on a share for share basis. Holders of Class A common shares are entitled to one vote per share and holders of Class B common shares are entitled to eight votes per share on matters submitted to shareholders for approval.
The following table provides additional information for our common shares:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | January 28, 2023 | | January 29, 2022 |
| Class A | | Class B | | Class A | | Class B |
Authorized shares | 250,000 | | | 100,000 | | | 250,000 | | | 100,000 | |
Issued shares | 88,803 | | | 7,733 | | | 87,793 | | | 7,733 | |
Outstanding shares | 55,921 | | | 7,733 | | | 65,624 | | | 7,733 | |
Treasury shares | 32,882 | | | — | | | 22,169 | | | — | |
We have authorized 100 million shares of no par value preferred shares, with no shares issued for any of the periods presented.
Share Repurchases- On August 17, 2017, the Board of Directors authorized the repurchase of an additional $500 million of Class A common shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. As of January 28, 2023, $187.4 million of Class A common shares remained available for repurchase under the program. The share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our Class A common shares under the program. Shares will be repurchased in the open market at times and in amounts considered appropriate based on price and market conditions.
ACCUMULATED OTHER COMPREHENSIVE LOSS
For 2022 and 2021, the change in accumulated other comprehensive loss was due to foreign currency translation adjustments as shown in the consolidated statements of shareholders' equity. For 2020, changes for the balances of each component of accumulated other comprehensive loss, net of tax, were as follows:
| | | | | | | | | | | | | | | | | |
(in thousands) | Foreign Currency Translation | | Available-for-Sale Securities | | Total |
Balance, February 1, 2020 | $ | (2,668) | | | $ | 173 | | | $ | (2,495) | |
Other comprehensive income (loss) before reclassifications | (618) | | | 195 | | | (423) | |
Amounts reclassified to non-operating income, net | — | | | (368) | | | (368) | |
Other comprehensive loss | (618) | | | (173) | | | (791) | |
Balance, January 30, 2021 | $ | (3,286) | | | $ | — | | | $ | (3,286) | |
8. RECEIVABLES
Receivables, net, consisted of the following:
| | | | | | | | | | | |
(in thousands) | January 28, 2023 | | January 29, 2022 |
Customer accounts receivables: | | | |
Serviced by third-party provider with guaranteed payment | $ | 19,539 | | | $ | 27,827 | |
Serviced by third-party provider without guaranteed payment | 103 | | | 82 | |
Serviced in-house | 5,138 | | | 2,783 | |
Income tax receivable | 44,021 | | | 162,240 | |
Other receivables | 9,274 | | | 8,026 | |
Total receivables | 78,075 | | | 200,958 | |
Allowance for doubtful accounts | (312) | | | (1,132) | |
| $ | 77,763 | | | $ | 199,826 | |
The following table presents the activity for the allowance for doubtful accounts:
| | | | | | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 | | | | |
Allowance for doubtful accounts - beginning of period | $ | (1,132) | | | $ | (1,194) | | | $ | (1,219) | | | | | |
Provision for bad debts | — | | | (40) | | | (1,041) | | | | | |
| | | | | | | | | |
Recoveries, write-offs, and other adjustments | 820 | | | 102 | | | 1,066 | | | | | |
Allowance for doubtful accounts - end of period | $ | (312) | | | $ | (1,132) | | | $ | (1,194) | | | | | |
9. PROPERTY AND EQUIPMENT
Property and equipment, net, consisted of the following:
| | | | | | | | | | | | | | | | | |
(dollars in thousands) | Useful Life (years) | | January 28, 2023 | | January 29, 2022 |
Land | Indefinite | | $ | 1,110 | | | $ | 1,110 | |
Buildings | 39 | | 12,485 | | | 12,485 | |
Building and leasehold improvements | 3-20 or the lease term if shorter | | 434,958 | | | 447,158 | |
Furniture, fixtures and equipment | 3-15 | | 437,606 | | | 466,405 | |
Software | 3-5 | | 217,485 | | | 206,579 | |
Construction-in-progress | | | 21,368 | | | 17,239 | |
Total property and equipment | | | 1,125,012 | | | 1,150,976 | |
Accumulated depreciation and amortization | | | (889,582) | | | (894,190) | |
Property and equipment, net | | | $ | 235,430 | | | $ | 256,786 | |
10. GOODWILL AND INTANGIBLE ASSETS
GOODWILL
The following table presents the changes to goodwill by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | January 28, 2023 | | January 29, 2022 |
| Goodwill | | Accumulated Impairments | | Net | | Goodwill | | Accumulated Impairments | | Net |
Beginning of period by segment: | | | | | | | | | | | |
U.S. Retail | $ | 93,655 | | | $ | — | | | $ | 93,655 | | | $ | 93,655 | | | $ | — | | | $ | 93,655 | |
Canada Retail | 43,114 | | | (43,114) | | | — | | | 43,086 | | | (43,086) | | | — | |
Brand Portfolio | 19,989 | | | (19,989) | | | — | | | 19,989 | | | (19,989) | | | — | |
| 156,758 | | | (63,103) | | | 93,655 | | | 156,730 | | | (63,075) | | | 93,655 | |
Activity by segment: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Canada Retail- | | | | | | | | | | | |
Currency translation adjustment | (1,757) | | | 1,757 | | | — | | | 28 | | | (28) | | | — | |
Brand Portfolio- | | | | | | | | | | | |
Acquired Topo goodwill | 3,460 | | | — | | | 3,460 | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| 1,703 | | | 1,757 | | | 3,460 | | | 28 | | | (28) | | | — | |
End of period by segment: | | | | | | | | | | | |
U.S. Retail | 93,655 | | | — | | | 93,655 | | | 93,655 | | | — | | | 93,655 | |
Canada Retail | 41,357 | | | (41,357) | | | — | | | 43,114 | | | (43,114) | | | — | |
Brand Portfolio | 23,449 | | | (19,989) | | | 3,460 | | | 19,989 | | | (19,989) | | | — | |
| $ | 158,461 | | | $ | (61,346) | | | $ | 97,115 | | | $ | 156,758 | | | $ | (63,103) | | | $ | 93,655 | |
INTANGIBLE ASSETS
Intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | January 28, 2023 | | January 29, 2022 |
| Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
Definite-lived customer relationships | $ | 7,852 | | | $ | (1,454) | | | $ | 6,398 | | | $ | 1,409 | | | $ | (1,409) | | | $ | — | |
Definite-lived tradename | 10,853 | | | (292) | | | 10,561 | | | — | | | — | | | — | |
Indefinite-lived trademarks and tradenames | 14,907 | | | — | | | 14,907 | | | 15,527 | | | — | | | 15,527 | |
| $ | 33,612 | | | $ | (1,746) | | | $ | 31,866 | | | $ | 16,936 | | | $ | (1,409) | | | $ | 15,527 | |
During 2022, we acquired the rights to the shoes.com tradename for $4.9 million, which was recorded as a definite lived tradename intangible asset with a useful life of 15 years. In addition, we recognized preliminary estimates of the fair value of the definite-lived customer relationships and tradename intangible assets from the Topo acquisition, which are amortized over a useful life of eight and 15 years, respectively.
11. ACCRUED EXPENSES
Accrued expenses consisted of the following:
| | | | | | | | | | | |
(in thousands) | January 28, 2023 | | January 29, 2022 |
Gift cards | $ | 35,121 | | | $ | 36,783 | |
Accrued compensation and related expenses | 45,019 | | | 41,603 | |
Accrued taxes | 19,419 | | | 28,327 | |
Loyalty programs deferred revenue | 16,900 | | | 15,736 | |
Sales returns allowances | 18,107 | | | 18,574 | |
Customer allowances and discounts | 1,230 | | | 2,097 | |
Other | 54,880 | | | 72,692 | |
| $ | 190,676 | | | $ | 215,812 | |
12. DEBT
Debt consisted of the following:
| | | | | | | | | | | |
(in thousands) | January 28, 2023 | | January 29, 2022 |
ABL Revolver | $ | 281,035 | | | $ | — | |
Term Loan | — | | | 231,250 | |
Total debt | 281,035 | | | 231,250 | |
Less unamortized Term Loan debt issuance costs | — | | | (5,714) | |
| | | |
Long-term debt | $ | 281,035 | | | $ | 225,536 | |
ABL Revolver- On March 30, 2022, we replaced our previous senior secured asset-based revolving credit facility with our current senior secured asset-based revolving credit facility ("ABL Revolver"), which provides a revolving line of credit of up to $550.0 million, including a Canadian sub-limit of up to $55.0 million, a $75.0 million sub-limit for the issuance of letters of credit, a $55.0 million sub-limit for swing-loan advances for U.S. borrowings, and a $5.5 million sub-limit for swing-loan advances for Canadian borrowings. Our ABL Revolver matures in March 2027 and is secured by a first-priority lien on substantially all of our personal property assets, including credit card receivables and inventory. The ABL Revolver may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the credit facility agreement. The amount of credit available is limited to a borrowing base formulated on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of January 28, 2023, the ABL Revolver had a borrowing base of $529.9 million, with $281.0 million in outstanding borrowings and $5.0 million in letters of credit issued, resulting in $243.9 million available for borrowings.
Borrowings and letters of credit issued under the ABL Revolver accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the Fed Funds Rate (as defined in the credit facility agreement and subject to a floor of 0%) plus 0.5%, and (iii) the one-month Adjusted Term SOFR (as defined in the credit facility agreement) plus 1.0%; or (B) a one-month, three-month or six-month Adjusted Term SOFR per annum (subject to a floor of 0%), plus, in each instance, an applicable rate to be determined based on average availability, with an interest rate of 6.6% as of January 28, 2023. Commitment fees are based on the unused portion of the ABL Revolver. Interest expense related to the ABL Revolver includes interest on borrowings and letters of credit, commitment fees, and the amortization of debt issuance costs.
Debt Covenants- As of January 28, 2023, the ABL Revolver required us to maintain a fixed charge coverage ratio covenant of not less than 1:1 when availability is less than the greater of $41.3 million or 10.0% of the maximum borrowing amount. The ABL Revolver also contains customary covenants restricting certain activities, including limitations on our ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability. The ABL Revolver contains customary events of default, including failure to comply with certain financial and other covenants. Upon an event of default that is not cured or waived within the cure periods, in addition to other remedies that may be available to the lenders, our obligations under the ABL Revolver may be accelerated, outstanding letters of credit may be required to be cash collateralized, and remedies may be exercised against the collateral. As of January 28, 2023, we were in compliance with all financial covenants contained in the ABL Revolver.
Termination of Term Loan- On February 8, 2022, we settled in full the $231.3 million principal amount outstanding on that date under our senior secured term loan agreement ("Term Loan"). In connection with this settlement, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs.
13. LEASES
We lease our stores, our distribution center located in New Jersey, and other facilities under operating lease arrangements with unrelated parties and related parties owned by the Schottenstein Affiliates. We pay variable amounts for certain lease and non-lease components, contingent rent based on sales for certain leases where the sales are in excess of specified levels, and leases that have certain contingent triggering events that are in effect. We also lease equipment under operating leases. We receive operating sublease income from unrelated third parties for leasing portions or all of certain properties.
Operating sublease income and lease expense consisted of the following:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Operating sublease income | $ | 10,077 | | | $ | 11,879 | | | $ | 12,219 | |
Operating lease expense: | | | | | |
Lease expense to unrelated parties | $ | 187,372 | | | $ | 192,146 | | | $ | 199,729 | |
Lease expense to related parties | 7,783 | | | 9,273 | | | 9,239 | |
Variable lease expense to unrelated parties | 71,830 | | | 73,159 | | | 63,881 | |
Variable lease expense to related parties | 1,422 | | | 1,520 | | | 1,341 | |
| $ | 268,407 | | | $ | 276,098 | | | $ | 274,190 | |
Lease term and discount rate for our operating leases were as follows:
| | | | | | | | | | | |
| January 28, 2023 | | January 29, 2022 |
Other operating lease information: | | | |
Weighted-average remaining lease term (years) | 5.7 | | 5.1 |
Weighted-average discount rate | 4.2 | % | | 4.0 | % |
As of January 28, 2023, our future fixed minimum lease payments are as follows:
| | | | | | | | | | | | | | | | | |
(in thousands) | Unrelated Parties | | Related Parties | | Total |
2023 | $ | 209,616 | | | $ | 6,292 | | | $ | 215,908 | |
2024 | 177,561 | | | 4,270 | | | 181,831 | |
2025 | 141,978 | | | 3,439 | | | 145,417 | |
2026 | 113,203 | | | 3,120 | | | 116,323 | |
2027 | 85,068 | | | 2,856 | | | 87,924 | |
Future fiscal years thereafter | 185,598 | | | 1,708 | | | 187,306 | |
| 913,024 | | | 21,685 | | | 934,709 | |
Less discounting impact on operating leases | (111,131) | | | (2,080) | | | (113,211) | |
Total operating lease liabilities | 801,893 | | | 19,605 | | | 821,498 | |
Less current operating lease liabilities | (184,519) | | | (5,567) | | | (190,086) | |
Non-current operating lease liabilities | $ | 617,374 | | | $ | 14,038 | | | $ | 631,412 | |
As of January 28, 2023, we had entered into lease commitments for one new store location and three store relocations where the leases have not yet commenced, and therefore the lease liabilities have not yet been recorded. We expect the lease commencement to begin over the next three fiscal quarters for these locations, and we will record additional operating lease liabilities of approximately $5.4 million.
14. COMMITMENTS AND CONTINGENCIES
Legal Proceedings- We are involved in various legal proceedings that are incidental to the conduct of our business. Although it is not possible to predict with certainty the eventual outcome of any litigation, we believe the amount of any potential liability with respect to current legal proceedings will not be material to the results of operations or financial condition. As additional information becomes available, we will assess any potential liability related to pending litigation and revise the estimates as needed.
Guarantees- We provide guarantees for lease obligations that are scheduled to expire in 2025 for locations that have been leased to third parties. If a third party does not pay the rent or vacates the premise, we may be required to make full rent payments to the landlord. As of January 28, 2023, the total future payment requirements for these guarantees were approximately $8.7 million.
Contractual Obligations- As of January 28, 2023, we had entered into various noncancelable purchase and service agreements, including agreements with remaining terms in excess of one year and construction commitments for capital items to be purchased for projects that were under construction or for which a lease has been signed. In addition, we have license agreements that allow us to use brands owned by third parties, including a license agreement with our equity investments (related parties), that have guaranteed minimum royalty payments.
As of January 28, 2023, our noncancelable purchase obligations and future guaranteed minimum royalty payments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Noncancelable Purchase Obligations | | Guaranteed Minimum Royalties |
| | | Unrelated Parties | | Related Parties | | Total |
2023 | $ | 13,831 | | | $ | 12,609 | | | $ | 18,550 | | | $ | 31,159 | |
2024 | 5,292 | | | 14,184 | | | 20,163 | | | 34,347 | |
2025 | 2,227 | | | 14,184 | | | 20,225 | | | 34,409 | |
2026 | 1,471 | | | 14,184 | | | 20,325 | | | 34,509 | |
2027 | 1,024 | | | 13,684 | | | 20,213 | | | 33,897 | |
Future fiscal years thereafter | 575 | | | 38,684 | | | 19,650 | | | 58,334 | |
| $ | 24,420 | | | $ | 107,529 | | | $ | 119,126 | | | $ | 226,655 | |
15. INCOME TAXES
Income (loss) before income taxes consisted of the following:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Domestic income (loss) | $ | 131,131 | | | $ | 161,409 | | | $ | (559,120) | |
Foreign income (loss) | 28,393 | | | 11,616 | | | (49,527) | |
| $ | 159,524 | | | $ | 173,025 | | | $ | (608,647) | |
Income tax provision (benefit) consisted of the following: | | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Current: | | | | | |
Federal | $ | 36,018 | | | $ | 16,696 | | | $ | (151,931) | |
Foreign | 449 | | | 1,774 | | | 1,451 | |
State and local | 12,120 | | | 1,061 | | | (3,840) | |
Total current tax expense (benefit) | 48,587 | | | 19,531 | | | (154,320) | |
Deferred: | | | | | |
Federal | (29,025) | | | (555) | | | 23,601 | |
Foreign | (12,113) | | | (556) | | | 1,504 | |
State and local | (10,591) | | | 124 | | | 9,287 | |
Total deferred tax expense (benefit) | (51,729) | | | (987) | | | 34,392 | |
Income tax provision (benefit) | $ | (3,142) | | | $ | 18,544 | | | $ | (119,928) | |
The following presents a reconciliation of the income tax provision (benefit) based on the U.S. federal statutory tax rate to the total tax provision (benefit):
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Income tax provision (benefit) at federal statutory rate | $ | 33,502 | | | $ | 36,335 | | | $ | (127,816) | |
State and local taxes, net of federal benefit (provision) | 7,955 | | | 7,870 | | | (23,678) | |
| | | | | |
| | | | | |
Change in valuation allowance | (55,654) | | | (29,950) | | | 87,579 | |
Non-deductible compensation | 4,683 | | | 5,531 | | | 840 | |
CARES Act rate differential | — | | | (1,697) | | | (57,894) | |
Federal interest income | (3,029) | | | (502) | | | — | |
Uncertain tax positions | 5,940 | | | 1,275 | | | (290) | |
Other | 3,461 | | | (318) | | | 1,331 | |
| $ | (3,142) | | | $ | 18,544 | | | $ | (119,928) | |
See Note 1, Description of Business and Significant Accounting Policies - Income Taxes, for discussion of the CARES Act rate differential and the change in valuation allowance.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:
| | | | | | | | | | | |
(in thousands) | January 28, 2023 | | January 29, 2022 |
Deferred tax assets: | | | |
Operating lease liabilities | $ | 209,310 | | | $ | 202,683 | |
Net operating losses | 21,688 | | | 27,516 | |
| | | |
Stock-based compensation | 9,503 | | | 10,334 | |
Inventories | 9,252 | | | 9,250 | |
Accrued expenses | 7,038 | | | 4,832 | |
Loyalty programs deferred revenue | 3,905 | | | 3,714 | |
State bonus depreciation | 3,655 | | | 3,253 | |
Intangible assets | 1,601 | | | 2,994 | |
Gift cards | 2,756 | | | 393 | |
| | | |
Other | 2,055 | | | 2,345 | |
| 270,763 | | | 267,314 | |
Less: valuation allowance | (14,027) | | | (70,762) | |
Total deferred tax assets, net of valuation allowance | 256,736 | | | 196,552 | |
Deferred tax liabilities: | | | |
Operating lease assets | (182,953) | | | (170,421) | |
Property and equipment | (19,068) | | | (26,527) | |
| | | |
Other | (6,430) | | | (3,210) | |
Total deferred tax liabilities | (208,451) | | | (200,158) | |
Net deferred tax assets (liabilities) | $ | 48,285 | | | $ | (3,606) | |
Net deferred income taxes are reported on the consolidated balance sheets as follows:
| | | | | | | | | | | |
(in thousands) | January 28, 2023 | | January 29, 2022 |
Deferred tax assets | $ | 48,285 | | | $ | 356 | |
Deferred tax liabilities included in other non-current liabilities | — | | | (3,962) | |
| $ | 48,285 | | | $ | (3,606) | |
As of January 28, 2023, the remaining valuation allowance was primarily related to state deferred tax assets. Additionally, there were $11.4 million state, $8.1 million foreign, and $2.2 million federal net operating losses, which, if not utilized, a portion of the carryovers will begin to expire in 2025, 2036, and 2038, respectively. The following table presents the changes in valuation allowance:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Valuation allowance - beginning of period | $ | 70,762 | | | $ | 101,185 | | | $ | 9,472 | |
Additions charged to income tax benefit | — | | | — | | | 87,579 | |
| | | | | |
Allowances taken or written off | (55,654) | | | (29,950) | | | — | |
Other adjustments | (1,081) | | | (473) | | | 4,134 | |
Valuation allowance - end of period | $ | 14,027 | | | $ | 70,762 | | | $ | 101,185 | |
We intend to continue to invest all of the earnings of foreign subsidiaries, as well as our capital in these subsidiaries, indefinitely outside of the U.S. and we do not expect to incur any significant additional taxes related to such amounts.
The following table presents the changes in gross unrecognized tax benefits:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Unrecognized tax benefits - beginning of period | $ | 11,108 | | | $ | 10,087 | | | $ | 10,764 | |
Additions for tax positions taken in the current year | 5,342 | | | 1,021 | | | 603 | |
| | | | | |
| | | | | |
| | | | | |
Settlements of tax positions taken in prior years | (665) | | | — | | | (1,280) | |
Unrecognized tax benefits - end of period | $ | 15,785 | | | $ | 11,108 | | | $ | 10,087 | |
Of the total unrecognized tax benefits at January 28, 2023, January 29, 2022 and January 30, 2021, $14.0 million, $9.5 million and $8.7 million, respectively, represented the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate in future periods. While it is expected that the amount of unrecognized tax benefits will change in the next 12 months, any changes are not expected to have a material impact on our financial position, results of operations, or cash flows. We recognize interest and penalties related to unrecognized tax benefits as a component of the income tax provision (benefit). As of January 28, 2023, January 29, 2022 and January 30, 2021, interest and penalties were $4.7 million, $3.1 million and $2.6 million, respectively.
16. SEGMENT REPORTING
Our three reportable segments, which are also operating segments, are the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. We have determined that the Chief Operating Decision Maker ("CODM") is our Chief Executive Officer and we have identified such segments based on internal management reporting and responsibilities. The performance of each segment is based primarily on net sales and gross profit. As a result, we do not allocate operating expenses to the segments. Total assets by segment are not presented in the table below as the CODM does not evaluate, manage, or measure performance of segments using total assets.
The following table provides certain financial data by segment reconciled to the consolidated financial statements:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | U.S. Retail | | Canada Retail | | Brand Portfolio | | Other | | Corporate / Eliminations | | Consolidated |
2022 | | | | | | | | | | | |
Net sales: | | | | | | | | | | | |
External customer sales | $ | 2,791,513 | | | $ | 283,241 | | | $ | 240,674 | | | $ | — | | | $ | — | | | $ | 3,315,428 | |
Intersegment sales | — | | | — | | | 87,041 | | | — | | | (87,041) | | | — | |
Total net sales | $ | 2,791,513 | | | $ | 283,241 | | | $ | 327,715 | | | $ | — | | | $ | (87,041) | | | $ | 3,315,428 | |
Gross profit | $ | 904,583 | | | $ | 99,121 | | | $ | 72,006 | | | $ | — | | | $ | 3,515 | | | $ | 1,079,225 | |
Income from equity investments | $ | — | | | $ | — | | | $ | 8,864 | | | $ | — | | | $ | — | | | $ | 8,864 | |
Cash paid for property and equipment | $ | 27,567 | | | $ | 3,169 | | | $ | 1,501 | | | $ | — | | | $ | 22,737 | | | $ | 54,974 | |
Depreciation and amortization | $ | 45,101 | | | $ | 6,629 | | | $ | 5,480 | | | $ | — | | | $ | 24,105 | | | $ | 81,315 | |
2021 | | | | | | | | | | | |
Net sales: | | | | | | | | | | | |
External customer sales | $ | 2,769,706 | | | $ | 234,809 | | | $ | 192,068 | | | $ | — | | | $ | — | | | $ | 3,196,583 | |
Intersegment sales | — | | | — | | | 93,956 | | | — | | | (93,956) | | | — | |
Total net sales | $ | 2,769,706 | | | $ | 234,809 | | | $ | 286,024 | | | $ | — | | | $ | (93,956) | | | $ | 3,196,583 | |
Gross profit | $ | 933,555 | | | $ | 76,728 | | | $ | 66,774 | | | $ | — | | | $ | (8,420) | | | $ | 1,068,637 | |
Income from equity investment | $ | — | | | $ | — | | | $ | 8,986 | | | $ | — | | | $ | — | | | $ | 8,986 | |
Cash paid for property and equipment | $ | 15,296 | | | $ | 3,225 | | | $ | 630 | | | $ | — | | | $ | 13,879 | | | $ | 33,030 | |
Depreciation and amortization | $ | 40,693 | | | $ | 7,378 | | | $ | 5,262 | | | $ | — | | | $ | 24,590 | | | $ | 77,923 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | U.S. Retail | | Canada Retail | | Brand Portfolio | | Other | | Corporate / Eliminations | | Consolidated |
2020 | | | | | | | | | | | |
Net sales: | | | | | | | | | | | |
External customer sales | $ | 1,800,323 | | | $ | 182,659 | | | $ | 188,828 | | | $ | 62,909 | | | $ | — | | | $ | 2,234,719 | |
Intersegment sales | — | | | — | | | 59,818 | | | — | | | (59,818) | | | — | |
Total net sales | $ | 1,800,323 | | | $ | 182,659 | | | $ | 248,646 | | | $ | 62,909 | | | $ | (59,818) | | | $ | 2,234,719 | |
Gross profit | $ | 242,786 | | | $ | 28,651 | | | $ | 36,393 | | | $ | 962 | | | $ | 2,449 | | | $ | 311,241 | |
Income from equity investment | $ | — | | | $ | — | | | $ | 9,329 | | | $ | — | | | $ | — | | | $ | 9,329 | |
Cash paid for property and equipment | $ | 9,997 | | | $ | 3,420 | | | $ | 1,194 | | | $ | 67 | | | $ | 16,436 | | | $ | 31,114 | |
Depreciation and amortization | $ | 47,083 | | | $ | 7,817 | | | $ | 5,433 | | | $ | 42 | | | $ | 27,651 | | | $ | 88,026 | |
The U.S. Retail and Brand Portfolio segments and Other net sales recognized were primarily based on sales to customers in the U.S., and the Canada Retail segment net sales recognized were based on sales to customers in Canada. Net sales realized from geographic markets outside of the U.S. and Canada were collectively immaterial.
As of January 28, 2023 and January 29, 2022, long-lived assets, consisting of property and equipment and operating lease assets, included $875.7 million and $835.9 million, respectively, in the U.S. and $58.6 million and $66.1 million, respectively, in Canada, with only an immaterial amount in other countries. No single customer accounted for 10% or more of consolidated total net sales. However, the Brand Portfolio segment has four customers that make up approximately 53% of its segment net sales, excluding intersegment net sales, and the loss of any or all of these customers could have a material adverse effect on the Brand Portfolio segment.
17. SUBSEQUENT EVENTS
Acquisition of Keds- On February 4, 2023, we acquired the Keds business, including the Keds brand, inventory, and inventory related accounts payable, from Wolverine World Wide, Inc. for $123.3 million. The Keds business designs, sources, and sells branded footwear and earns revenue from the wholesale of products to retailers in the U.S. and Canada, the wholesale of products to international distributors, and the sale of branded products through direct-to-consumer e-commerce sites in the U.S. and Canada. The purchase price of the acquisition was funded with available cash and borrowings on the ABL Revolver. We will account for the acquisition and include the results of the Keds business in our Brand Portfolio segment beginning with our first quarter of 2023. Given the acquisition date, we are in the process of developing our fair value assumptions for the assets and liabilities acquired.
ABL Revolver Amendment- On February 28, 2023, the ABL Revolver was amended to increase the available capacity under the revolving line of credit from $550.0 million to $600.0 million and to add a first-in last-out term loan (the "FILO Term Loan") of up to $30.0 million, which was drawn in full on the date of the amendment, subject to a borrowing base. The FILO Term Loan may be repaid in full, but not in part, so long as certain payment conditions are satisfied. Once repaid, no portion of the FILO Term Loan may be reborrowed. The maturity date of the ABL Revolver did not change and is applicable to the FILO Term Loan. The interest rate on the revolving line of credit remains unchanged, and the FILO Term Loan will accrue interest, at our option, at a rate equal to (A) a fluctuating interest rate per annum equal to the greatest of (i) the prime rate, (ii) the Fed Funds Rate plus 0.5%, or (iii) Adjusted Term SOFR plus 1.0%, plus 2.25%; or (B) Adjusted Term SOFR for the interest period in effect for such borrowing plus 3.25%. The ABL Revolver was also amended to change the period during which we are required to maintain a fixed charge coverage ratio of not less than 1:1 when availability is less than the greater of $47.3 million or 10% of the maximum borrowing amount.
Dividends- On March 15, 2023, the Board of Directors declared a quarterly cash dividend payment of $0.05 per share for both Class A and Class B common shares. The dividend will be paid on April 14, 2023 to shareholders of record as of the close of business on March 31, 2023.